Who would have guessed that even the law is a sucker for perfection? The Personal Property Securities Register (PPSR) implemented in 2012 subscribes to the age-old adage that possession is nine-tenths of the law.
Even if you own the property, failure to register your interest in whole or even part incorrectly on the PPSR can have far-reaching consequences for your business.
Identifying your lease as a PPS lease provides you in a place of highest priority in any situation where someone questions ownership of the property. While this does not negate the validity of legal title in a priority dispute, a registered security interest remains the best way of safeguarding your personal property.
Read on to learn how to avoid the common mistakes when it comes to the murky area of legal ‘interests’ in personal property.
What is a PPS Lease?
Section 13 of the Personal Property Security Act 2009 (PPSA)1 defines a PPS Lease as a lease or bailment of goods:
- For a term of more than 2 years
- For a term up to two (2) years, that is automatically renewable or renewable at the option of one of the parties
- For an indefinite term.
This means that a lease which falls within the categories referred to in Section 13, is a PPS Lease by which a lessor or bailor must perfect the lease by way of a PPS Registration.
As PPS leases are ‘deemed’ under the law there is no requirement for:
- Parties to agree that a security interest arises as a result of the arrangement
- The PPS lease to secure monetary payment
- The performance of an obligation (as is required other security interests such as a genuine security interest).
When should a PPS lease be registered on the PPSR?
Registrations of PPS leases on the PPSR should be made as soon as possible to secure the highest level of priority over other security interests in the same property.
In addition, ideally, the PPS lease should be registered at the time of the arrangement to correctly inform the other parties to the arrangement of your legal title and PPSR over the leased property within the lease.
What happens if a lease is not perfected on the PPSR?
‘Perfection’, as the term suggests, is registration without any fault or hindrances on the PPSR. In a priority dispute over personal property, to ensure your legal title is valid and enforceable, you need to ‘perfect’ your interest on the PPSR.
In Forge Group Power Pty Limited (In Liquidation) (Receivers and Managers Appointed) v General Electric International Inc,2 the court decided if a PPS lease is not registered at the time of administration or liquidation of the grantor, the property in question will vest in the grantor.
Forge Group Power Pty Limited (In Liquidation) (Receivers and Managers Appointed) (Forge) contracted with Horizon Power to supply and provide for the project to design a power station at Port Headland. Under the contract, Forge entered into a lease with General Electric International Inc. (General Electric) where General Electric agreed to rent four (4) turbine generators to Forge for use in the project. Following the installing of the turbines, Forge entered into voluntary administration, and liquidation, shortly after.
The key issue in the case was whether the PPSA applied to the turbine lease (and ultimately who ‘owned’ the turbines).
The court decided that, at the time of the administration, General Electric did not hold a registered security interest over the turbines and, as the company was in the business of regularly leasing goods, the turbine lease would constitute a PPS Lease. As such, pursuant to section 267 of the PPSA, unperfected security interests vest in the grantor upon the grantor’s administration or liquidation. Therefore, the turbines would vest with Forge.
While the decision in Forge was a situation where the interest had not been recorded on the PPSR at all, there is a risk of losing title to assets that are deemed to be PPS leases where the lease has been recorded on the PPSR but there is an error in the registration.
Some may say intention speaks volumes but this simply isn’t the case with PPS leases.
In OneSteel Manufacturing Pty Limited (Administrator Appointed) ,3 Alleasing Pty Ltd (Alleasing) entered into a leasing arrangement with One Steel Manufacturing Pty Ltd (Administrators Appointed) (OneSteel) under which OneSteel rented machinery and other equipment from Alleasing worth approximately $23 million. Following a second rental arrangement, Alleasing registered its security interests for both PPS leases on the PPSR within time. However, both PPS registrations made by Alleasing identified OneSteel’s ABN and not its can. This is vital when it comes to the PPSR.
Subsequently, OneSteel entered into voluntary administration. The administrators immediately identified the ABN-ACN mishap. They announced that that Alleasing’s property, worth $23 million, would vest with OneSteel pursuant to Section 267 of the PPSA.
Given that Section 267 of the PPSA provides that, in all its entirety, an unperfected security interest vests in the grantor, in Forge and OneSteel, the leased equipment vested in the administrators.
What does this mean?
The grey area between legal title and a PPS lease highlights the importance of perfecting security interests via registration on the PPSR. In the event of administration or liquidation, an unperfected interest in the property, as in the case, can cause the lease to be invalid in its entirety regardless of valid legal title of the lessor.
Despite what your leasing agreement states, if the lease is deemed to be a PPS lease, it must be perfected. Otherwise, you risk losing your goods, and potentially hundreds of thousands of dollars, as was the case for Forge and Alleasing.
For this reason, we suggest you make sure your interest is ‘perfected’ on the PPSR to protect your property and business from other parties, particularly where they are on the cusp of administration or liquidation.